Industry body Associated Chambers of Commerce and Industry of India (ASSOCHAM) has asked Punjab government to eliminate wide divergence in state VAT rates in case of highly taxed products like cigarettes. Punjab has hiked VAT on cigarettes to 22 per cent along with 0.05 per cent of other state levies. This is in spite of the recommendations of Empowered Committee of all State Finance Ministers in January 2005 to maintain a general VAT rate of 12.5 per cent on cigarettes, common for all the states, it said.

This trend of divergence in VAT rates will lead to large-scale smuggling, evasion of taxes and other criminal activities, said Assocham, National Secretary General, DS Rawat in a letter to Punjab Chief Minister Prakash Singh Badal.

Assocham recommends that a uniform VAT rate on cigarettes would encourage legitimate sales of cigarettes thereby increasing revenue of the state government. It will also be consistent with principles of VAT and proposed GST regime.

Besides, it will also prevent migration to cheap and revenue in-efficient miscellaneous tobacco products contributing to social objectives of tobacco control and public health, added Rawat. Incidently, illegal cigarettes trade accounts for 16 per cent of the whole industry in India and has risen by 58 per cent during the period 2004-09.

Apart from this, illicit trade of duty evaded cigarettes accounts for 10 per cent of the industry affecting revenue collections by Rs. 1,000 crore. Assocham believes high taxation encourages growth of illegal inter-state trade and due to increased price consumers are being forced to consume cheap and affordable alternatives like bidis, gutka.

These lead to increase in overall tobacco consumption, thereby defeating objectives of public health and also affecting revenue collections, it said.